China is underreporting the amount of steel it makes by about 40m tonnes a year – roughly the amount made by Germany – according to a new analysis that provides insights into the recent high prices for the main raw material used by the world steel industry.

Now, Chinese statistical discrepancies are nothing new, nor should they be unexpected. Often the goals of any kind of reporting don’t coincide with existing incentives of those who need to make the reports. This seems to be the case in the steel industry as well.

Behind the underreporting, according to Peter Fish, Meps managing director, is that plants that Beijing would like to shut down because they are not economical and produce too much pollution have stayed open to meet local demand.

One could argue that this is just another example of why economic policy should be made by the market and not the state, but the case could just as easily be made is that both monitoring and enforcement are lax on the local level. In the end, what is certain is that such discrepancies, rampant as they are in China (Local debt is another sector where this is a problem), will lead to misallocations on either the micro or macro level and the resulting imbalances will need to be rectified. Whether this will happen as a large systemic shock or a policy led soft landing remains to be seen.